The Story so far…

The crisis that started with the Housing bubble was first called the ‘Real estate crisis’, then a new named emerged, ‘Sub-prime crisis’. As the economic troubled deepened and the financial institutions started getting affected, it became ‘The Credit crisis’, after a few weeks it was ‘Liquidity crisis’, after a month it became, ‘The Moral crisis on the Wall Street’ and lastly, my favorite, 'The Great Depression-II’, but in the history books it will go down as ‘The Great Recession’.

It’s been four years since the crisis started but US economy is still under the weather. To recap the current ‘not-so-exciting’ news, Un-employment is at 9.1% (Shadow unemployment is close to 17%), housing prices fell to their lowest since 2002 ; factory output and car sales dipped in the current quarter and the Dow industrial fell for the fifth consecutive week. All these vital signs indicate a double dip recession. And there is a very very bleak chance that economy will grow at Fed’s predicted growth rate of 3.3% for the year. Not to mention the most politicized economic issue of our time, the Federal Debt ceiling, which is still debated in congress with no conclusion in sight.

             

Although I am a Keynesian, I also believe that when Demand creation doesn’t work, focus has to move towards the Supply side and I think that’s why government’s role is so important at this junction of the US economy. It’s a simple math:

GDP= C (Consumer) + G (Government) + I (Investment/Businesses) + X (Export) - M (Import).

When C & I (directly related to X & M) are not functioning, G has to come into the picture to maintain the GDP. On the Monetary front, Mr. Bernanke has kept our short term interest rate to almost 0% and thanks to the demand by foreigners our long term interest rates are also at a historic low. But consumer and businesses are still uncertain about the future and hence are hoarding cash (US businesses has $2T cash on there balance sheet). So when monetary policy can’t function Fiscal policy has to come into the picture and I think this is where the current white house administration is missing the point.

I have said this before and will say it again...It’s the corporate tax stupid!!

At 35%, the U.S. corporate tax rate is one of the highest in the world. Agreed, loopholes enable savvy companies to pay a lot less but the effective tax rate is still among the highest, (2011 Business Roundtable). Only Japan, Brazil, Uzbekistan, Chad and Argentina have higher corporate tax rates than the U.S. The effective U.S. corporate tax on new investment was 34.6% in 2010. This was higher than the average OECD rate of 18.6%. (2010 Cato Institute)

The urgency and zeal that President Obama showed during the Health Care bill, (The Bill that was wanted but not needed at this point of time) he needs to show that same enthusiasm for bringing the reforms to the US corporate tax. If not for the average Americans, do it for the corporate donations, Mr. President!!